![]() Similarly, as with the FTSE, the two tables highlight the same challenges to the investors with remarkably familiar MDDs when comparing the same crashes. “Living In A Drawdown State – 60% Of The Time”. Table 3: Maximum Drawdowns Stock Market Crash Similarly, to the FTSE analysis Table 3 quantifies the most severe crashes during the research period, whilst Table 4 quantifies the drawdown state. 4īy far, the most extreme MDD occurred in the US during the Great Depression, which stemmed from the Wall Street Crash. US stock market drawdowns for the period from 1927 to 2016 also show regular and significant peak-trough declines across all decades. ![]() The two tables, especially when viewed in tandem, highlights the two main challenges the investor has to overcome when considering drawdowns (i) the inevitability of material crashes on a cyclical basis and (ii) the drawdown state is time abundant with declines greater than one-fifth of the peak prevailing for 27% of the time. Source: “The psychology of drawdowns” (2017). Table 1: Maximum Drawdowns Stock Market Crash ![]() As such, Table 1 quantifies the most severe crashes during the period under review, whilst Table 2 quantifies the drawdown state, being the consequence of recurrent stock market corrections. When utilising two data sets, the ‘extreme’ and the ‘natural’ state, is it only then possible to appreciate the importance of drawdowns and its potential impact on the investor both financially and psychologically. UK stock market drawdowns for the period from 1969 to 2017 show regular and significant peak-trough declines across all decades. Losses are constant and frequent, and can occur under any economic conditions and cycles. Unsurprisingly, when analysing drawdown data from the FTSE All-Share Index (FTSE) and the S&P 500 the same overarching conclusion materialises. Risk is a constant and the analysis of drawdowns across the main indices over long timespans provides a tangible representation of this inherent exposure. Stocks do not make new highs every day and so the outcome is the investor is usually in a drawdown state. Source: “The Formula: Maximum drawdown” (2018). P = Peak value before largest drop L = Lowest value before new high established 1 A maximum drawdown (MDD) is the maximum loss of an investment during a specific period and is highly relevant as it is an important indicator of downside risk. It measures the peak-to-trough decline in the value of a portfolio before a new peak is achieved. Investors must accept their stocks will be underwater from portfolio high watermarks most of the time.
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